ABEV Ambev SA

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AMBEV REPORTS 2016 FOURTH QUARTER AND FULL YEAR RESULTS UNDER IFRS

São Paulo, March 2, 2017 – Ambev S.A. [BOVESPA: ABEV3; NYSE: ABEV] announces today its results for the 2016 fourth quarter and full year 2016. The following operating and financial information, unless otherwise indicated, is presented in nominal Reais and prepared according to International Financial Reporting Standards (IFRS), and should be read together with our financial information for the twelve-month period ended December 31, 2016 filed with the CVM and submitted to the SEC.

Top line performance: Top line was flattish in the quarter (+0.4%), as solid growth in CAC (+8.9%) and LAS (+19.3%) was impacted by a decline in Brazil (-9.7%) and Canada (-0.5%). Volumes were down 5.6% while net revenue per hectoliter (NR/hl) was up by 6.3%. In the full year, top line increased 1.9%, as Brazil’s top line decline (-5.2%) was more than offset by solid performance in (i) CAC (+14.0%), as our business in the region continued to grow; (ii) LAS (+15.8%), due to a strong NR/hl performance partially offset by volumes decline in Argentina; and (iii) Canada (+0.7%). On a consolidated basis, volumes declined 5.8% mainly explained by Brazil and Argentina, where the challenging macroeconomic scenario continued to put pressure on consumers, while NR/hl was up by a solid 8.3%, due to our revenue management initiatives.

Cost of Goods Sold (COGS): Our COGS increased 6.8% in the quarter, while on a per hectoliter basis COGS was up by 13.1%. In the full year, COGS and COGS/hl increased 6.5% and 13.1%, respectively, mainly driven by Brazil.

Selling, General & Administrative (SG&A) expenses: SG&A (excluding depreciation and amortization) was up by 7.5% in the quarter and 7.6% in the full year, mainly explained by higher sales and marketing expenses, as we continued to invest in our brands, partially offset by efficiency gains in administrative expenses across all our operations.

EBITDA, Gross margin and EBITDA margin : Normalized EBITDA was R$ 6,015 million (-12.1%) in the quarter with gross margin and EBITDA margin compression of 210bps and 650bps, respectively. In the full year, EBITDA was R$ 19,483 million (-6.9%) with gross margin contracting 150bps and EBITDA margin contracting 410bps, driven by Brazil (-820bps) and Canada (-50bps) partially offset by CAC (+220bps) and LAS (+180bps).

Net Profit, Normalized Net Profit and EPS : Net Profit reached R$ 4,834 million in the quarter, 13.5% above 4Q15, while on a normalized basis Net Profit declined 15.9% to R$ 3,656 million.  In the full year, Net Profit was up 1.6% to R$ 13,083 million, while adjusted by exceptional items, Net Profit was down 9.7% to R$ 11,949 million, as EBITDA decline and higher net finance results due to the cost of carry of our hedges and non cash accretion expenses related to our investment in the Dominican Republic were partially offset by a lower effective tax rate. EPS was R$ 0.80 and N ormalized EPS was R$ 0.75 in the full year.

Operating Cash Generation and CAPEX : C ash generated from operations reached R$ 7,920 million in the quarter while R$ 17,702 million in the full year. CAPEX totaled R$ 4,133 million, with CAPEX Brazil declining 35% year over year (R$ 1,969 million), in line with our guidance.

Pay-out and Financial discipline : During 2016, we returned R$ 10,046 million to equity holders in dividends and interest on capital. As of December 31 ^st , 2016, our net cash position was R$ 2,763 million. This figure does not include the dividend payment of R$ 0.07 per share (approximately R$ 1.1 billion) announced on December 22 ^nd , 2016, made as of February 23 ^rd , 2017.

Note: Earnings p er share calculation is based on outstanding shares (total existing shares excluding shares held in treasury).

2016 proved to be one of the most challenging years of our history. The solid growth in our international operations was impacted by Brazil’s weak performance, resulting in a 6.9% decline of our consolidated EBITDA.

In Brasil, our results were mainly impacted by (i) state taxes increase, putting additional pressure on top line, (ii) political and economic uncertainties with unemployment rates among the highest recorded in years, deteriorating disposable income and leading to industry decline, and (iii) COGS impacted by the FX.

We acknowledge that Brazil’s long term development involves unavoidable periods of volatility and that Brazilians are facing a very tough environment, but we measure our performance based on absolute values and we are not pleased with our 2016 results.

On the other hand, the drivers that support our long term model have not changed: (i) demographics, (ii) reduction of regional disparities, and (iii) consumer’s continuous demand for innovative products and strong brands. Based on that, we continue to work on the evolution of our commercial platforms:

·          Elevate the Core

o     We are implementing a visual brand identity renovation, through the launching of new VBIs for Skol and Brahma, differentiating and reinforcing even more the brand’s attributes. We are also improving our primary and secondary packaging, enhancing the brand’s quality perception.

o     Tests with consumers have shown that Skol’s new visual brand identity has improved significantly its attributes of quality, drinkability and modernity and it has also increased consumer’s interest in the brand purchase.

·          Accelerate Premium

o     Led by Budweiser that increased double digits for the fifth consecutive year (over 20% in 2016), premium continued to grow, reaching more than 10% of our beer volumes.

o     Budweiser consolidated its position as the leading brand in the premium segment and the brand’s preference and attributes, such as authenticity, heritage and quality, continued to trend up.

·          Near Beer

o     The Beats family continued to grow double digits in 2016. We have launched Secret, with its red bottle that, together with Senses and Spirit, represent more than 1% of our beer volume in Brazil.

o     With massive presence in key selling moments and strong activation during Carnival, the cool Beats family also enhances the equity of the Skol mother brand.

·          In Home

o     One of our biggest initiatives in 2016 was the 300ml returnable glass bottles, that were boosted by our national campaign “Mini, everything that is good returns!”. Having an affordable proposition, they represented 23% of beer volumes in the supermarkets in 2016, driving affordability to our consumers.

·          Out of Home

o       We continued to boost the out of home occasion through new liquids, new packaging and trade marketing programs.

o       We are stepping up our route to market initiatives to assure a great service level everywhere, building a strong platform and making our brands even more available in the POCs, with the best in class execution.

In CSD & NANC Brazil, while the industry came under significant pressure due to the difficult consumer environment, Lipton, Gatorade and Fusion volumes continued to grow, with Fusion becoming the second largest brand in the energy drinks segment in Brazil.

In Central America and the Caribbean (CAC), we had another year of double digits top line growth and EBITDA margin expansion. In Latin America South (LAS), our revenue management strategy and cost discipline in Argentina played once again an important role to tackle the adverse scenario in the country that, coupled with a solid volume performance in the other key operations in the region such as Bolivia, Chile and Paraguay, led to strong EBITDA growth. And in Canada, our top line and EBITDA benefited from our strategic acquisitions in the year.

Looking at our divisional performance highlights:

·          Brazil . Our top line in Brazil was down 9.7% in the quarter while EBITDA declined 30.8% to R$ 3,598 million with a 1430bps margin compression. In the full year, top line was down 5.2%, as volume decline of 6.5% was partially offset by a NR/hl increase of 1.3%. EBITDA was down 19.7% to R$ 11,321 million, with an 820bps margin compression.

o       In Beer Brazil , net revenue was down 11.5% in the quarter and 5.7% in the full year. Our market share according to Nielsen was 66.3% in the full year.

§   Volumes were down 7.3% in the quarter and 6.6% in the full year, mainly driven by the adverse macroeconomic environment that led to a strong retraction in domestic consumption.

§   NR/hl in beer was down 4.6% in the quarter due to a hard comparable in 4Q15 while, on a sequential basis, it was up 17.3% driven by our revenue management initiatives implemented during the quarter. In the full year, NR/hl was up 1.1% mainly impacted by taxes increase. In addition, as part of our revenue management strategy, we used our full portfolio of packs and brands to achieve more attractive consumer prices, including the 300ml returnable glass bottles that accounted for 23% of our volumes in supermarkets in 2016.

o       In CSD & NANC Brazil , top line was up 1.7% in the quarter and down 2.7% in the full year. Volumes were down 6.7% in the quarter and 6.0% in the full year, in line with the CSD industry decline of mid single digit, as consumers continued to reduce CSD consumption trading down to water or low cost powder juices. NR/hl in CSD & NANC was up 9.0% in the quarter and 3.5% in the full year, driven by our revenue management initiatives. Our market share according to Nielsen was 18.8% in 2016.

o       Brazil cash COGS/hl and cash COGS increased in the quarter 20.0% and 11.5%, respectively. In the full year, cash COGS/hl was up 15.4% while cash COGS increased by 7.9%, in line with our guidance of mid to high single digit growth, driven by FX impacts partially offset by the benefit of RGBs coupled with the continuous evolution of our cost initiatives.

o       Brazil cash SG&A was up 2.2% in the quarter driven by higher distribution and administrative expenses partly offset by sales and marketing expenses . In the full year, cash SG&A was up 3.5% while, below inflation, in the upper limit of our guidance, due to (i) mid single digit logistics costs increase; (ii) decrease of administrative costs by low double digits and; (iii) high single digit increase in sales and marketing expenses, as we continued to invest behind our brands.

·          Central America and the Caribbean (CAC) . EBITDA in the region reached R$ 398 million (+25.4%) in the quarter, driven by a net revenue growth of 8.9% with an EBITDA margin expansion of 510bps, to 38.5%. In the full year, top line was up 14.0% coupled with an EBITDA margin expansion of 220bps to 37.3%, leading to an EBITDA of R$ 1,484 million (+21.3%).

o       We had another year of robust top line growth in the region, with a great balance between volumes and revenue management. While flattish in the quarter (+0.3%), volumes increased 6.2% in the full year mainly driven by (i) Dominican Republic, where we were able to significantly increase the beer category, reaching our all time high share of throat, and (ii) Guatemala, where we had another year of market share gains with a strong performance of our Mexican brands, led by Corona that grew double digits in the year.

·          Latin America South (LAS) . EBITDA in the region reached R$ 1,528 million (+27.6%) in 4Q16 with top line increasing 19.3%. In the full year top line was up 15.8% and EBITDA grew 20.6% with an EBITDA margin expansion of 180bps to 44.1%.

o       Volumes were down 2.8% in the quarter and 8.3% in the full year, as the decline of the Argentinean industry, still impacted by the adverse macroeconomic environment in the country, was partially offset by strong performance in (i) Bolivia, driven by 710ml returnable glass bottles launch of Paceña and route to market improvement; (ii) Paraguay, with the successful roll out of the 340ml returnable glass bottle and the premium growth, led by Corona and Bud66; and (iii) Chile, with strong performance of our Global Brands in the country.

·          Canada. In 4Q16, EBITDA in Canada reached R$ 491 million (+3.2%), as our top line performance (-0.5% organically; +3.0% in local currency, including the result of recent acquisitions of craft and near beer brands) was offset by our cost discipline driving EBITDA margin expansion of 140bps . In the full year, our top line was up 0.7% and EBITDA declined 0.8% organically, mainly impacted by higher sales and marketing investment. When included our recent acquisitions, top line and EBITDA increased in local currency 8.3% and 3.0%, respectively.

o     We continued our momentum of top line growth in Canada. Our reported volumes grew 5.7% in the full year mainly driven by the benefit of our strategic acquisitions in the fast growing craft, ready-to-drink and cider categories, helping us to achieve the highest market share figure in 17 years . On a like for like basis, volumes were down 1.2%, impacted by unfavorable weather, partially offset by strong performance from (i) Bud Light in the premium segment as the fastest growing brand in Canada in 2016; and (ii) Stella Artois in the high-end, reaching its highest share ever in 4Q16 .

We believe 2016 was a bridge year as 2017 is widely expected to be an year in which the main macro headwinds will dissipate, as: (i) inflation continues to decelerate; (ii) GDP is estimated to be flattish, after two consecutive years of decline; (iii) unemployment, while still increasing, is expected to revert the trend in the second semester, and (iv) as a consequence, disposable income is likely to resume growth towards the end of the year.     

In this environment, we are cautiously optimistic for the Brazilian beer industry in 2017, especially for the second half of the year. Our commitment is long term in nature and we are confident on our ability to gain market share and resume our top line and EBITDA growth, supported by the structural investments made in recent years and by the strengths of our brands.

Along with that, we expect Cash COGS/hl in Brazil to positively evolve over 2017, increasing (i) double digits in the first half, and (ii) low single digits to flattish in the second half, mainly explained by the impact of the devaluation of the Brazilian Real during the first half of 2016 (our average implied foreign exchange hedge rate for 2017 is 3.59 BRL/USD, which compares to 3.24 BRL/USD in 2016).

Across other geographies, in Central America and the Caribbean (CAC), we expect another year of solid top line and EBITDA performance, also supported by our new operations in Panama. In LAS, we remain confident on our ability to continue to grow our business, despite the inherent volatility of the region. Finally, in Canada we will continue pursuing a healthy top line growth with high profitability, leveraging the recent acquisitions we made in craft and near-beer.

The combination of Ambev’s operations in Latin America North (LAN), Latin America South (LAS) and Canada’s business units, eliminating intercompany transactions, comprises our consolidated financial statements. The figures shown below are on an as-reported basis.

We delivered during the quarter R$ 13,177.5 million of Net Revenue (+0.4%) and R$ 6,014.7 million of EBITDA (-12.1%). In the full year, Net Revenue was up 1.9% to R$ 45,602.6 million while EBITDA decreased 6.9% to R$ 19,483.1 million.

Our LAN region includes Beer Brazil, CSD & NANC Brazil and Central America and the Caribbean (CAC) operations. LAN EBITDA totaled R$ 3,996.1 million in the quarter (-26.9%) and R$ 12,805.0 million in the full year (-16.6%).

We delivered R$ 3,597.9 million (-30.8%) of EBITDA in Brazil in the quarter, with an EBITDA margin of 47.1% (-1430bps yoy). Net revenue was down 9.7% in 4Q16, with a volume decline of 7.1% and a NR/hl decrease of 2.7%. Cash COGS was up 11.5% mainly driven by a 20.0% increase in cash COGS/hl, as our hedges were still impacted by the severe devaluation of the BRL in the second half of 2015 . SG&A (excluding depreciation and amortization) expenses were up 2.2% in the quarter.

In the full year, EBITDA was R$ 11,321.2 million (-19.7%), with an EBITDA margin of 45.4% (-820bps). Top line was down 5.2% and NR/hl was up 1.3%. Cash COGS was up 7.9%, in line with our guidance of mid to high single digit growth; and cash SG&A was up 3.5% while, below inflation, in the upper limit of our guidance.

In 4Q16, Beer Brazil (i) EBITDA was R$ 2,972.3 million (-32.6%), with an EBITDA margin compression of 1450bps to 46.2%; (ii) volumes declined 7.3%; (iii) net revenue was down 11.5% and NR/hl was down 4.6%, due to a hard comparable in 4Q15 while, on a sequential basis, it was up 17.3% driven by our revenue management initiatives implemented during the quarter; (iv) cash COGS/hl increased by 19.4%; and (v) cash SG&A declined 1.6% due to phasing of sales & marketing expenses, that were more concentrated in the previous quarters due to Rio 2016 Olympic Games and lower administrative expenses, partially offset by higher distribution expenses.

In the full year, Beer Brazil (i) EBITDA was R$ 9,618.6 million (-20,1%), with an EBITDA margin compression of 820bps to 45.4%; (ii) volumes declined 6.6%, as the adverse macroeconomic environment led to a strong retraction in domestic consumption; (iii) net revenue was down 5.7% and NR/hl was up 1.1%, mainly impacted by taxes increase, along with the use of our full portfolio of packs and brands to achieve more attractive consumer prices, as part of our revenue management strategy; (iv) cash COGS/hl increased by 16.0%, due to FX impact; and (v) cash SG&A increased 1.6%.

In the quarter, Brazil CSD & NANC (i) EBITDA was R$ 625.6 million (-20.5%) with an EBITDA margin of 51.5% (-1430bps); (ii) volumes declined 6.7%; (iii) net revenue and NR/hl  increased 1.7% and 9.0%, respectively; (iv) cash COGS/hl was up 23.0%; and (v) cash SG&A spending increased 42.4%, mainly explained by higher sales and marketing expenses and revision of our logistics and administrative cost allocation to better reflect the CSD & NANC operations in our business in Brazil.

In the full year, Brazil CSD & NANC (i) EBITDA was R$ 1,702.6 million (-17.4%) with an EBITDA margin of 45.0% (-810bps); (ii) volumes declined 6.0%, in line with the CSD industry decline of mid single digit; (iii) net revenue was down 2.7% mainly due to negative volumes, as consumers continued to trade down CSD consumption to water or low cost powder juices, while NR/hl  increased 3.5%, due to our revenue management initiatives; (iv) cash COGS/hl was up 13.3% as our FX hedges were impacted by the BRL devaluation of the 2 ^nd half of 2015; and (v) cash SG&A spending increased 20.5%, due to the revision of our cost allocation as mentioned for the quarter.